Thomas Sowell on The Great Depression and Economic Recovery

Sowell writes:

Guess who said the following: "We have tried spending money. We are spending more than we have ever spent before and it does not work." ...

It was Henry Morgenthau, Secretary of the Treasury under President Franklin D. Roosevelt and one of FDR's closest advisers.

He added, "after eight years of this Administration we have just as much unemployment as when we started. . . And an enormous debt to boot!"...

Far from pulling the country out of the Great Depression by following Keynesian policies, FDR created policies that prolonged the depression until it was more than twice as long as any other depression in American history. Moreover, Roosevelt's ad hoc improvisations followed nothing as coherent as Keynesian economics...

It is not a pretty story. But we need to understand it if we want to avoid the ugly consequences of very similar policies today.

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War Does Not Produce Prosperity

Sheldon Richman writes:

Many bad ideas go under the rubric “Keynesian economics,” but perhaps the worst is that government spending — no matter what kind — can genuinely stimulate of an economy and increase the general welfare.

To see how ridiculous this idea is, have a look at what the leading Progressive Keynesian, Paul Krugman, and leading conservative Keynesian, Martin Feldstein, agree on: a big war is apparently the only way left to get the U.S. economy out of its doldrums. The National Journal reports that at a recent economic forum, Krugman and Feldstein agreed that Washington is too paralyzed to sufficiently stimulate the economy. “Only a high-impact ‘exogenous’ shock like a major war — something similar to what Krugman called the ‘coordinated fiscal expansion known as World War II’ — would be enough to break the cycle,” the report stated.

”I don’t think we’re about to launch a war against anybody,” Feldstein responded. “But Paul is right. That was the fiscal move that got us out” of the Great Depression.

Here is Keynesian economics taken to its logical end: government spending is so essential to restarting a stalled economy that a major war — with all its death and destruction — may be the only way to achieve the stimulation needed. It may go too far to say that Krugman and Feldstein would relish a war, but only by a little. They clearly believe that in the current circumstances, war is our only hope.

There is a superficial logic here. If you believe government spending stimulates an economy, then why not war? In a big war government taxes and borrows huge amounts of money in order to buy large quantities of things — airplanes, tanks, Humvees, bombs, guns, bullets, supplies, clothing, food. It also pays lots of people — bureaucrats, soldiers, sailors, pilots, engineers, manufacturing workers — to do things. In turn the recipients spend that money on the necessities of life. Hence, the jumpstart to the economy.

But of course war means death, injury, and destruction. How can making things that will be used to destroy other things, including lives, produce economic well-being? Are we really ready to accept the Orwellian notion that war is prosperity?

If we have reached the point of seeing war as a source of good things, it is time to check our premises. Right away we see that if the government pays people money to make war materiel, private entrepreneurs can’t pay them to make things consumers will want to buy. This is the “broken window” fallacy: being so distracted by the visible “benefits” of a government policy that one overlooks the unseen costs. Government doesn’t create resources; it only moves them around. When government taxes or borrows, it transfers scarce resources and labor from the productive sector to politicians and bureaucrats. The Keynesian will say that since the resources are idle, there is no cost and only benefits from the transfer. That is a shallow response.

Resources may well be idle, but there’s a reason for that. A recession follows a government-produced inflationary boom that misallocates resources by artificially lowering the interest rate. The misled entrepreneurs thus put resources in the wrong places and commit them to the wrong purposes relative to consumer preferences. When the boom ends and the recession sets in, the errors reveal themselves and have to be corrected. That takes time, but government delays the recovery by interfering and by poisoning the investment climate with uncertainty. Who will commit to a long-term project while unsure what tax or regulatory policy might be next month or next year?

As for World War II’s ending the Great Depression: nonsense. The Depression was bad because living standards fell when, because of the previous inflationary boom, production didn’t match consumer preferences. Business projects were liquidated, creating high unemployment, and government interference and uncertainty impeded recovery. The war did not restore living standards — consumer goods were rationed — and unemployment ended only because of conscription. Improved statistical aggregates for national income or investment only concealed what was really going on. What ended the Depression was not government spending but the retrenchment of government after the war.

So thank goodness we don’t need a war to prosper. Shame on those who say we do.

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War and Economic Recovery

Doug Casey on War

Louis James interviews Doug Casey

L: Nothing like a good war to distract people from their own misery – and their own responsibility for their individual circumstances.

Doug: That's right, at least until their house gets blown up or their son gets killed. Nothing like a good foreign war against an invariably evil and subhuman enemy to distract people from local problems. And, of course, there are actually fools out there that believe war stimulates economies.

L: Yes… Can't tell you how many times I've heard that WWII ended the Great Depression – they told me so in school, so it must be so. Alas, the dumb masses.

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Keynesians and Repeating Mistakes of the Past

It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes’s The General Theory of Employment, Interest and Money, in 1936.

Niall Ferguson

The British government, following the advice of Winston Churchill, who was Chancellor of the Exchequer, in 1925 restored the gold standard at the pre-World War I ratio, despite the fact that the wartime monetary inflation had driven up the price of goods. Gold should not have been priced at the pre-War price. But Churchill had decided that national pride was at stake. He pretended that the debasing of the pound sterling had not been government policy.

There was an outflow of gold from the Bank of England. Speculators thought the price of gold in pounds would have to be officially hiked. To keep this outflow from forcing the Bank of England to suspend payment, thereby confirming the forecasts of the speculators, the head of the Bank of England met with the head of the New York Federal Reserve in 1926 and persuaded him to inflate the dollar, so as not to make the dollar too valuable in relation to the pound. This would have caused investors to sell pounds and buy dollars. The U.S. government would then have sent pounds to Britain and asked for payment in gold. The New York FED did what the Bank of England asked. It inflated the dollar. The result was the stock market boom from 1926–1929.

The head of the New York FED died in 1928. His successor recognized that a stock market bubble was in process. The FED ceased inflating. Short-term interest rates rose. This popped the stock market bubble in October of 1929.

The government then intervened. It raised tariffs. It began massive deficit spending. It began to interfere with pricing, so as to keep prices and wages high. In short, it adopted Keynesian policies, which made the economy much worse.

read the entire essay

Walter Williams on Recessions and Stimulus

Walter Williams writes:

Let's think about President Obama's failed economic stimulus program. Before getting to the nitty-gritty of why stimulus packages fail, let's look at the failed stimulus program of Obama's hero, Franklin Delano Roosevelt. FDR's Treasury Secretary, Henry Morgenthau, wrote in his diary: "We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!"...

The Great Depression did not end until after WWII... "The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened." Professors Cole and Ohanian argue that FDR's economic policies added at least seven years to the depression.

Where do the trillion-plus dollars come from that Congress and Obama are spending in an effort to stimulate the economy? How about Santa Claus, or maybe the Tooth Fairy? If you said, "Come on, Williams, you're being silly! The only way government can spend a dollar is to tax or borrow it," go to the head of the class. In the case of a tax, one should ask what would that taxpayer have done with the dollar had it not been taxed away. He would have spent it on something that would have created a job for someone. If the government hadn't borrowed the dollar, it might have been invested in some project that would have created a job. When government taxes, borrows and spends, it shifts unemployment from one sector to another. Of course, the sector that benefits tends to be a political favorite of the shifter.

Between 1787 and 1930, our nation has seen both mild and severe economic downturns, sometimes called panics, that have ranged from one to seven years. During that interval, no one considered it to be the business of the federal government to try to get the economy out of a depression because there was no constitutional authority to do so. It took Hoover, FDR and a frightened and derelict U.S. Supreme Court to turn what might have been a three- or four-year sharp downturn into a 15-year meltdown.

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The Greater Depression Lies Ahead

If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution...

The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks.

The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.

Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt...

To make matters even worse, during this current crisis our government's response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross federal debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign when viewed from a historical perspective.

The U.S. entered the current Great Recession with gross national debt equal to 65% of GDP. It has since exploded to 90% of GDP! Comparing the relatively innocuous level of the 1930s with today's pile of government debt clearly illustrates the perilous state of the economy...

Many observers--unfortunately including most of those in power--have concluded that the government must spend more while consumers rein in their debts. Their strategy is based on the belief that once the economy perks up they can unwind that debt.

There are two problems with this Keynesian theory. One is that government spending doesn't increase GDP; it only chokes off private-sector growth. The other is that politicians never regard the present as a good time for the government to pay off its debts...

read the entire essay

Unemployment: FDR v. Obama

In March 1933, when the Great Depression had driven the U.S. economy to rock bottom, the unemployment rate stood at 25 percent. One out of every four Americans who had had a job in 1929 was queuing in a bread line rather than working on an assembly line.

The unemployment rate remained at historically high levels throughout the following decade. Despite massive increases in federal spending under President Franklin D. Roosevelt's New Deal, 14 percent of the labor force still was unemployed in 1941...

Didn't the alphabet soup of work-relief programs the president subsequently launched - the Civilian Conservation Corps, the National Youth Administration, the Federal Emergency Relief Administration and especially the Works Progress Administration, to name just a few - create jobs for hundreds of thousands of unemployed Americans, providing them with sorely needed incomes without forcing them to suffer the stigmas of the dole?

The answer: The United States in the 1930s recognized that government-funded make-work jobs were not the same as real jobs...

The employment and unemployment statistics of the 1930s excluded people who would not be employed in the absence of public largesse.

People at that time recognized that someone who holds a job only because Congress has appropriated money for the position is not creating wealth but is merely the recipient of an income transfer. Those who at the time derided the WPA as "We Piddle Around" recognized the wasteful consequences of public profligacy.

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Did FDR End the Depression?

Burt Folsom says no:

'He got us out of the Great Depression." That's probably the most frequent comment made about President Franklin Roosevelt, who died 65 years ago today. Every Democratic president from Truman to Obama has believed it, and each has used FDR's New Deal as a model for expanding the government.

It's a myth. FDR did not get us out of the Great Depression—not during the 1930s, and only in a limited sense during World War II.

Let's start with the New Deal. Its various alphabet-soup agencies—the WPA, AAA, NRA and even the TVA (Tennessee Valley Authority)—failed to create sustainable jobs. In May 1939, U.S. unemployment still exceeded 20%. European countries, according to a League of Nations survey, averaged only about 12% in 1938. The New Deal, by forcing taxes up and discouraging entrepreneurs from investing, probably did more harm than good.

What about World War II? We need to understand that the near-full employment during the conflict was temporary. Ten million to 12 million soldiers overseas and another 10 million to 15 million people making tanks, bullets and war materiel do not a lasting recovery make. The country essentially traded temporary jobs for a skyrocketing national debt. Many of those jobs had little or no value after the war.

No one knew this more than FDR himself. His key advisers were frantic at the possibility of the Great Depression's return when the war ended and the soldiers came home. The president believed a New Deal revival was the answer—and on Oct. 28, 1944, about six months before his death, he spelled out his vision for a postwar America. It included government-subsidized housing, federal involvement in health care, more TVA projects, and the "right to a useful and remunerative job" provided by the federal government if necessary...

Congress—both chambers with Democratic majorities—responded by just saying "no." No to the whole New Deal revival: no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes. Income tax rates were cut across the board. FDR's top marginal rate, 94% on all income over $200,000, was cut to 86.45%. The lowest rate was cut to 19% from 23%, and with a change in the amount of income exempt from taxation an estimated 12 million Americans were eliminated from the tax rolls entirely...

Congress substituted the tonic of freedom for FDR's New Deal revival and the American economy recovered well. Unemployment, which had been in double digits throughout the 1930s, was only 3.9% in 1946 and, except for a couple of short recessions, remained in that range for the next decade.

The Great Depression was over, no thanks to FDR. Yet the myth of his New Deal lives on. With the current effort by President Obama to emulate some of FDR's programs to get us out of the recent deep recession, this myth should be laid to rest.

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Jacob Hornberger: Capitalism Has Not Failed

Suppose you were to give a one-question test in public schools across the country and, for that matter, to all graduates of U.S. public high schools: “True or False: The Great Depression was caused by the failure of America’s free-enterprise system.”

There can really be no doubt about what the answer would be. The vast majority of respondents would answer: True.

Yet, the correct answer is False. As Milton Friedman, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and others have documented so well, the Great Depression was caused by the Federal Reserve, America’s central bank, a federal institution that is antithetical to free enterprise...

Alas, the deception and delusion are not limited to the Great Depression.

Today, we might well be witnessing the death throes of America’s welfare state and warfare state. Everywhere you look, the entire statist system is in crisis or chaos.

Social Security, Medicare, Medicaid, Fannie Mae, Freddie Mac, FDIC, the drug war, Iraq, Afghanistan, the dollar, federal spending, the national debt, stimulus plans, foreign aid, nationalizations, corporate and banking bailouts, and on and on.

The whole welfare-warfare system is busted, broke, bankrupt. With each passing day, it gets worse and worse, as federal officials continue to double down their bets in the hopes that somehow the system is going to come out fine.

But notice what the statists are saying: That it’s not socialism or imperialism that have failed, it’s free enterprise!

read the entire essay

Stimulus or Sowing the Seeds of Depression?

Government intervention, in all of its forms, distorts the market place; it directs scarce resources away from productive ventures to unproductive ventures. The measures, taxation, borrowing, and monetary inflation, which the government utilizes to pay for the extravagances of its various stimulus proposals and other constitutionally dubious programs, generate negative economic consequences. Economic prosperity is the product of innovative entrepreneurs who use capital, which is derived from real savings, to produce additional goods and services that market participants can purchase at lower prices. The government stimulus plans encourage capital consumption, which reduces the supply of goods available to consumers, and lays the foundation for an economic depression. The government’s response to the current economic crisis is the identical policies that contributed to the Great Depression. This is not the appropriate foundation for long term economic prosperity, but the inappropriate path to economic ruin.

read the entire essay

My thoughts: An outstanding essay.

The Depression of 1920-21

It is a cliché that if we do not study the past we are condemned to repeat it. Almost equally certain, however, is that if there are lessons to be learned from an historical episode, the political class will draw all the wrong ones—and often deliberately so. Far from viewing the past as a potential source of wisdom and insight, political regimes have a habit of employing history as an ideological weapon, to be distorted and manipulated in the service of present-day ambitions. That’s what Winston Churchill meant when he described the history of the Soviet Union as “unpredictable.”...

If the Austrian view is correct—and I believe the theoretical and empirical evidence strongly indicates that it is—then the best approach to recovery would be close to the opposite of these Keynesian strategies. The government budget should be cut, not increased, thereby releasing resources that private actors can use to realign the capital structure. The money supply should not be increased. Bailouts merely freeze entrepreneurial error in place, instead of allowing the redistribution of resources into the hands of parties better able to provide for consumer demands in light of entrepreneurs’ new understanding of real conditions. Emergency lending to troubled firms perpetuates the misallocation of resources and extends favoritism to firms engaged in unsustainable activities at the expense of sound firms prepared to put those resources to more appropriate use....

The experience of 1920–21 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920–21 depression. It is because those things were avoided that recovery came. The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode—and observe how hastily our interrogators try to change the subject.

read the entire essay

Great Depression Unemployment

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Economic Contractions in the United States: A Failure of Government

Seeking 'not to let a crisis go to waste', left-leaning politicians and old-style Keynesian economists want to remedy the alleged failure of capitalism with a rising tide of big government. Let the budget deficits rip, empower the unions, socialise healthcare, increase trade protection, go green, and socialise the financial and industrial base.

The irony, as Charles Rowley and Nathanael Smith show in this timely monograph, is that the Keynesian policy prescriptions that are serving as the pretext for this programme have already been tried. Expansionary fiscal and monetary policies by the Bush administration and the Greenspan Fed were implemented to deal with the recession of 2001, and are precisely what caused the current crisis.

Applying sound economic reasoning and cutting-edge public choice theory, Rowley and Smith show that both the Great Depression and the current economic contraction were caused by failures not of capitalism, but of government. While monetary policy was the primary culprit in the 1930s, the interventionist policies of the Hoover and Roosevelt administrations exacerbated the downturn and stifled recovery. Fortunately, the monetary policy of the independent Fed is much better now (thought the Fed has unduly widened its role), but elected politicians are pursuing problems of intervention and re-regulation similar to those pursued in the 1930s. If these adverse trends are not reversed, the dynamic laissez-faire capitalism of the United States will be assimilated to the state capitalism and economic stagnation of Western Europe.

The authors outline a radical free-market approach to policy reform, designed to restore the United States economy to its stellar performance during the final fifteen years of the 20th century.

read the entire paper

How to Avoid Great Depression II

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch... The proper injunction to government in a depression is cut the budget and leave the economy strictly alone.
Murray Rothbard

A Program of True Economic Reform

1) End the Fed.

2) Restore sound money to the economy.

3) Lower taxes and cut government spending.

4) No bailouts.

5) Allow prices and wages to fall to levels set by the market.

6) Regulate the government, not private property and markets.

read the entire essay

My thoughts: This is an outstanding essay that provides many fact and figures debunking the idea that massive government intervention can solve economic problems.

The Mises Institute: Great Depression Seminar

The videos of the the recent (4/4/09) Mises Institute Conference. The Great Depression: What Can We Learn From It Today.

Walter Block, 80 Years Later: Parallels Between 1929 and 2009
Thomas DiLorenzo, A Recipe for the Next Great Depression
Jeffrey Tucker, Dissident Publishing: Then and Now
Douglas E. French, Bubble Economics
Thomas E Woods, Jr., Why You've Never Heard of the Great Depression of 1920

Ron Paul on Real Time with Bill Maher

Bibliography on the Great Depression

In the present recession, advocates of government intervention often evoke the specter of the Great Depression. Unless the government intervenes massively, we are told, we risk an economic collapse comparable to that of the 1930s. To see the fallacy of this claim, it is imperative to understand that government intervention both led to the depression and prevented recovery from it. The following books, I hope, will assist those interested in grasping what happened in this vital historical era.

link to the full list

My thoughts: A much needed list to inform and educate people about the most significant economic event of the 20th century.

Also of interest: Gordon's Books on Liberty Bibliography

The Bailout Reader

Dan Mitchell on the Failure of Keynesianism

Joseph Salerno on Barlett's Keynesianism

But in terms of fiscal policy, Roosevelt's error wasn't that he spent too much, but that he didn't spend nearly enough...

The critics were also totally opposed to deficit spending.... they said that federal borrowing would simply draw funds out of productive uses in the private sector to be squandered on make-work government jobs, pork barrel projects of dubious value and welfare programs that would sap the dynamism of the American economy.

read the essay

Joe Salerno responds:

This is pure old-style deficit-spending cum multiplier-Keynesianism through and through, without even the thinnest veneer of supply-side tax-cutting babble. He refers to Friedman and Schwartz, but they did not support massive deficit-spending; they rejected the Keynesian notion that the country was in a liquidity trap and therefore monetary policy was ineffective and like "pushing on a string." Bartlett is really a Krugmaniac.

My thoughts: Barlett has gone from being a fairly reliable supporter and defender of lower taxes to another Keynesian hack trying to make socialism and central planning work this time.